UK equity valuations are among the lowest in DM, but caution is still warranted. We wait for an upturn in our LEI before considering longs in UK domestic stocks

UK-specific risks subsided sharply following the conclusion of a bilateral trade deal with the EU at the end of 2020. With the prospect of a disorderly no-deal now defused, equity valuations will eventually adjust higher as the Brexit discount is priced out and the UK’s policy fundamentals come back into view (relative political stability, independent monetary policy).

Charts Source: Bloomberg, Macrobond and Variant Perception

UK valuations are among the lowest in DM and on a sectoral basis, the insurance, homebuilding and metals sub-indices screen particularly cheap.

Charts Source: Bloomberg, Macrobond and Variant Perception

Despite seemingly enticing valuations and the conclusion of a Brexit deal, caution is still warranted for the time being. The UK economy has been one of the most severely hit in Europe and our LEI outlook is negative while neutral or positive for every other country. The escalation in coronavirus infections and renewed national lockdown have only damaged the outlook further.

Charts Source: Bloomberg, Macrobond and Variant Perception

With that in mind, we urge caution towards UK stocks and particularly multinationals which have significantly outperformed domestic firms.

Charts Source: Bloomberg, Macrobond and Variant Perception

Local company earnings have seemingly bottomed, unlike multinationals, but we would wait for our LEI to turn higher before investing in lagging UK domestic stocks.

Charts Source: Bloomberg, Macrobond and Variant Perception